McGraw-Hill/Irwin
With contributions by
Stephen H. Penman Columbia University
Clinic I-2
Introduction
Accounting clinic I contains the following:
A brief review of the four financial
statements
Examples of how each financial statement
is prepared
A summary of the principles of
measurement in financial statement
Clinic I-3
The Balance
Sheet: Dell Inc.
Clinic I-5
Clinic I-6
$150,000
30,000
450,000
400,000
150,000
89,000
283,000
117,000
520,000
143,000
45,000
?
$93,000
264,000
950,000
25,000
97,630
232,000
242,000
360,000
450,000
640,000
1,200,000
Required:
Prepare a classified balance sheet.
Clinic I-8
Solution
$
360,000
117,000
143,000
242,000
89,000
951,000
Current assets
Cash
Trading securities
Accounts receivable
Inventory
Prepaid insurance
Total current assets
Property, plant and equipment
Land
Buildings
Less acc. depreciation
Equipment
Less acc. depreciation
Total Property, plant and equipment
Intangible assets
Patent
Total assets
520,000
1,200,000
(450,000)
950,000
(232,000)
750,000
718,000
1,988,000
150,000
3,089,000
$
283,000
264,000
30,000
93,000
45,000
715,000
Current liabilities
Accounts payable
Notes payable
Interest payable
Income taxes payable
Rent payable
Total current liabilities
Long-term liabilities
Long term loan from bank
Bonds payable
Less discount on bonds payable
Total long term liabilities
Total liabilities
450,000
(25,000)
Stockholders equity
Capital stock
Preferred stock, $10 par;
Common stock, $5 par
Retained earnings
Total stockholders equity
150,000
400,000
640,000
425,000
1,065,000
1,780,000
550,000
759,000
3,089,000
Clinic I-11
409,000
282,000
5,000,000
2,548,000
26,000
76,000
42,000
31,000
24,000
81,000
108,000
62,000
58,000
257,000
96,000
176,000
Clinic I-13
Solution
Net Sales (1)
Cost of goods sold (2)
Gross profit
Selling expense (3)
Administrative expense (4)
Income from operations
Other expense
Income before taxes
Income taxes (35%)
Income before extraordinary item
Extraordinary loss, net of $33,600 taxes
Net income
4,958,000
2,460,000
2,498,000
499,000
394,000
893,000
1,605,000
176,000
1,429,000
500,150
928,850
62,400
866,450
(1) 5,000,000-42,000
(2) 409,000+(2,548,000+81,000-31,000)-547,000
(3) 257,000+76,000+108,000+58,000
(4) 282,000+26,000+24,000+62,000
Clinic I-14
The Statement of
Cash Flows : Dell Inc.
Clinic I-15
Clinic I-16
Clinic I-17
Clinic I-18
Clinic I-20
70
170
200
1,500
500
500
(190)
2004
110
300
240
550
(200)
2,750
Accounts Payable
Bonds Payable
Deferred tax liability
Common Stock
Retained Earnings
120
1,000
380
1,220
30
1,000
200
300
250
250
2,750
1,000
Clinic I-21
Additional Information:
Equipment with original cost of $50 was sold for $35
Dividend declared and paid in cash was $300
Stocks and Bonds were issued for cash
Net income reported was $80.
Required:
Prepare a statement of cash flow for 2005
Note: Cash from operating activities involves
adjusting net income for all the non-cash items in
net income.
Clinic I-22
Solution
Scientific Instruments, Ltd.
Statement of Cash Flow
For the year ended December 31, 2005
Cash flows from operating activities
Net Income
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sale of equipment
Depreciation
Increase in deferred tax liability
Decrease in accounts receivables
Decrease in inventories
Decrease in accounts payable
Net cash provided by operating activities
80
(10)
15
80
130
40
(80)
(1,500)
(500)
35
970
1,000
(300)
175
255
(1,965)
1,670
(40)
110
70
Clinic I-23
Clinic I-24
Shareholders Equity
Has two primary components:
contributed capital which represents
stockholders investment common stock (par
value) and additional paid in capital, and
retained earnings which equals cumulative net
income minus cumulative dividends since the
formation of the company. (Dividends are
distributions of assets to stockholders.)
Clinic I-25
Comprehensive Income
Comprehensive income in net income
(from the income statement) plus other
comprehensive income
To avoid earnings fluctuations some of the
unrealized gains/losses are reported in
other comprehensive income and not
included in net income.
Clinic I-26
Clinic I-27
Clinic I-28
Cash
+ Other Assets
Cash
+ Other Assets
Investment and
disinvestment
by owners
Net income and other earnings
Net change in owners equity
Total Assets
- Liabilities
Owners equity
Income Statement
Revenues
Expenses
Net income
Clinic I-29
Principles of Measurement
Two types of measurement are used in
financial statements
Fair value accounting
Assets and liabilities are reported at their
fair value and gains and losses from
revaluing them are reported in the income
statement or as part of other comprehensive
income in the equity statement. Fair value is
either market value or an estimate of value.
Clinic I-30
Clinic I-33
Equity investments
Trading
Available-for-sale
XXX
XXX
XXX
(XXX)
XXX
Clinic I-37
Clinic I-38
Clinic I-40
Clinic I-41